At the end of January, the first month of the business year, the usual adjusting entry transferring rent earned from the unearned rent account to a revenue account was omitted. Indicate which items will be incorrectly stated, because of the error, on (a) the income statement for January and (b) the balance sheet as of January 31. Also indicate whether the items in error will be overstated or understated.

Answer and Explanation:

a. In the case of the income statement

Revenues would be understated as the revenue is not credited

Expenses would remain unchanged

Net income would be understated due to the revenues

b. In the case of the balance sheet

Asset would remain unchanged

Liabilities would be overstated as the rent would not be transferred

Owner equity would be understated as there is a lower net income that low the retained earnings so automatically the owner equity would be understated

c is the correct answer.

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